Courts foresee deluge of suits for two-way GST in real estate

KOLKATA: Uncertainty about the applicability of the goods and servicesNSE 2.36 % tax on joint development agreements, an increasingly popular form of property construction in West Bengal, is expected to result in a large number of cases being filed in the Calcutta High Court.

In joint development agreements, landowners transfer land to builders or authorise them to construct buildings on them in return for one or more apartments or payments or a combination of both. According to tax experts, it’s not clear at what stage GST has to be paid and at what valuation.

“It is a developing law and there are bound to be disputes during implementation, prompting individuals or builders to take legal recourse,” said advocate Paritosh Sinha of Sinha & Co., a law firm that has been approached by real estate developers to help resolve disagreements with land owners in such matters.

Until now, landowners has no issues with joint development agreements involving area share, where ownership of the land was transferred. Only stamp duty was payable unless a separate consideration was reached for the transfer of development rights. The situation changed when a notification in January said GST was payable by both landowners and developers.

“Besides the need for additional compliances by the landowner under the GST law, the notification has also brought up issues concerning valuation of supply of development rights as the consideration is in kind,” said Arvind Baheti, executive director at Khaitan & Co.

Baheti said landowners will have to obtain GST registration, file returns, pay tax and maintain books of accounts even though they may not be willing to undertake additional compliances and thus, come under the scanner of the tax authorities.

According to tax experts, there is ambiguity with respect to ‘the point in time’ when tax has to be paid and this may lead to conflicts between landowners and developers.

“While the landowner would like to pay GST at the time of entering into a development agreement to protect his interests and recover the same from the builder, the developer would prefer to postpone GST payment on development rights to save on interest costs,” a tax consultant explained.

There also seems to be lack of clarity over the value on which GST is to be paid on the transfer of development rights. If the value on which GST is paid – initially by the landowner – is found to be lower by the tax authorities, the developers may not be able to claim input tax credits.

Kolkata’s real estate circle has voiced concern over ‘the point of taxation’ and the ‘valuation of flats’ allotted to landowners, prompting the West Bengal wing of the Confederation of Real Estate Developers’ Associations of India, an umbrella organisation of builders from the state, to seek clarifications.

Industry experts said the January notification assumes significance, with a majority of landlords and builders opting to sign joint development agreements rather than outright land deals. While builders prefer this because it supports their capital-light business strategy, landowners are usually in it for higher revenue potential than just a one-time consideration.